Depositary bank

A custodian holds securities for a client and acts on the instructions of that client. A depositary does the same safekeeping for a fund, and it also checks the manager: it controls whether orders comply with the fund rules and the law, whether the cash flows are complete and whether the NAV is calculated correctly. A custodian answers to its client, while a depositary has a legal duty toward the investors of the fund.

A depositary may delegate custody to a sub-custodian, for example for securities held in other countries, but it remains responsible for choosing and monitoring that sub-custodian. The related term depository usually means a central securities depository, which keeps the register of issued securities for a whole market and settles trades between banks.

The AIFMD and the UCITS Directive set out the duties of a fund depositary in three groups:

• Safekeeping: custody of financial instruments in segregated accounts, and ownership verification with record keeping for all other assets.
• Cash monitoring: every payment into and out of the fund runs through accounts the depositary can see.
• Oversight: checks on subscriptions and redemptions, valuation, investment limits, timely settlement of transactions and the use of income.

In Germany the Capital Investment Code (KAGB) transposes these rules, and BaFin must approve the choice of depositary for a public fund. In Luxembourg the CSSF supervises depositaries, and a Luxembourg fund needs a depositary with an establishment in Luxembourg.

For financial instruments held in custody, the depositary carries a strict liability. If such an instrument is lost, the depositary returns an identical instrument or the corresponding amount to the fund without undue delay, unless the loss results from an external event beyond its reasonable control. For other assets, such as real estate, private equity stakes or derivatives contracts, the depositary verifies ownership and keeps a record, and it is liable for losses caused by its negligence or intentional failure.

A fund that holds crypto-assets directly needs a depositary that can see who controls the private keys. A blockchain shows which address holds which assets, but it does not show the legal owner behind that address, so the depositary reconciles wallet addresses and transaction hashes with the records of the custodian, the accounts of the fund and its bank statements.

The Luxembourg supervisor CSSF describes two models in its FAQ on crypto-assets for investment funds. In the first model the depositary holds a MiCA license for custody of crypto-assets and keeps the coins itself, with full liability for their return. In the second model the fund appoints a specialized crypto custodian under a direct contract, and the depositary is then liable only for ownership verification and record keeping.

For an investor, the depositary is the reason that fund assets stay safe if the fund manager fails. The assets belong to the fund, they sit in segregated accounts at the depositary, and they are not part of the insolvency estate of the manager. The depositary also refuses payments and orders that break the fund rules, which gives investors a second line of control next to the manager.

The fund administrator keeps the books, calculates the NAV and maintains the register of investors. The depositary checks that this calculation follows the law and the valuation policy, but it does not calculate the NAV itself. Banks often offer both services within one group, and the two units then work separately, so that the depositary checks the work of its sister unit independently.

For a UCITS, the depositary is a national central bank, a credit institution or another legal entity that national law authorizes for the role. For an alternative investment fund, it is a credit institution, an investment firm or another eligible institution. For closed-ended funds without redemption rights for five years, such as many private equity and real estate funds, member states may also allow a professional trustee whose regular business includes depositary work.